FTSE 350: Real estate offers quality growth opportunities

Valuations within the sector have risen since the December election

January 30, 2020

Those who invested in the FTSE 350’s myriad real estate sector last year will have picked up some quality stocks relatively cheaply. A diverse set of property companies including office developer and landlord CLS (CLS) and industrial specialist and housebuilder St Modwen (SMP) traded at sharp discounts to forecast book value prior for most of the year. Yet all bar one of the sector’s constituents – property management services specialist Daejan (DJAN) – outperformed the broader index by some measure during the period.

Since the election the level of discount being applied to some of the shares has reduced as sentiment towards the sector’s prospects has improved. Yet there is still solid growth and income on offer from a variety of areas of real estate at some attractive prices. Examples include private rental landlord Grainger (GRI), which is tapping into rising demand for private rented sector (PRS) homes. The sector accounted for 20.6 per cent of UK households in 2019, according to research by the Office for National Statistics, up from 13 per cent in 2007. That figure is forecast by estate agency Knight Frank to rise to 22 per cent by 2023. The rising inflation-linked dividend payments are forecast by analysts at Panmure Gordon to reach 8.2p a share by 2022, 58 per cent higher than 2019 and representing a 2.7 per cent yield on the current share price.

Alongside PRS assets, logistics is one of the sectors that has attracted the highest valuations in recent years, with prime investment yields falling to 4 per cent at the end of December, according to research by Savills (SVS). Industrial and logistics accounts for almost 40 per cent of St Modwen’s portfolio by value, yet the shares offer one of the few opportunities to gain exposure to the in-demand sector at a discount to the group’s forecast book value at the November 2020 year-end.

Favourite

The value of Grainger’s private rental assets surpassed that of its portfolio of regulated tenancy homes last year, following the £396m acquisition in 2018 of the remaining 75 per cent stake in GRIP real estate investment trust that it did not already own. That means the group is forecast to earn more money from rental income than lumpier trading profits, which are generated from development work and selling vacated regulated-tenancy homes. Analysts at Panmure Gordon forecast a 10 per cent rise in the group’s net asset value over the next two years, yet the shares still trade at a 7 per cent discount to forecast book value at the September 2021 year-end.

Outsider

Capital & Counties (CAPC) managed to rid itself of its troublesome Earls Court development, which had dragged down the overall portfolio valuation, in December. However, the group’s remaining Covent Garden properties are still positioned within the struggling retail sector. Like-for-like valuations rose a meagre 0.5 per cent during the first half of last year – admittedly a better performance than the devaluations suffered by some peers – but the structural challenges still make the group a risky investment proposition.

IC Sector	NAME	Price (p)	Market cap (£m)	12-month (%)	Fwd PE	Yield (%)	Last IC View
Real estate	Capital & Counties Properties	254	2,168	7.10%	159	0.60%	Hold, 216.6p, 25 Jul 2019
Real estate	CLS	280	1,141	18.80%	22	2.50%	Buy, 258p, 31 Oct 2019
Real estate	Daejan	5,210	849	-11.20%	-	2.00%	-
Real estate	Grainger	300	1,829	33.80%	25	1.70%	Buy, 302p, 2 Jan 2020
Real estate	Savills	1,240	1,688	55.10%	17	1.30%	Hold, 924p, 9 Aug 2019
Real estate	Sirius Real Estate	90	928	48.00%	20	3.50%	Buy, 77p, 25 Nov 2019
Real estate	St. Modwen Properties	500	1,111	19.80%	31	1.50%	Buy, 411p, 5 Sep 2019